Coronavirus Pandemic and Your Investments. To Sell or Not to Sell?

This is just a quick note to update you on the recent market volatility caused by the dreaded Coronavirus, and to also provide an overview of the situation which will hopefully bring some peace of mind.

It is quite understandable to feel a certain level of fear or anxiousness in such volatile and uncertain market times, especially when you see significant falls in investments or fund values. Below we have provided an overview of what has happened with markets on the back of the Coronavirus outbreak and will explain the rationale as to why in times like this it is often better to remain invested (despite this sounding entirely illogical).

Overview

When the outbreak of the Coronavirus in Wuhan first hit the headlines, the effect on markets was fairly tame, especially in developed countries in the west. However, over the last 3 weeks or so, new cases have emerged across Europe which have had a much more devastating impact on markets.

We´ve seen a huge investor sell-off on the back of Coronavirus fears. The correction in the US stock market during the first week ranks as one of the fastest 10% declines in the history of the S&P 500 (top 500 US companies). Many other countries saw similar corrections.

The sell-off in markets is a rational reaction to the growing downside risk to economies and corporate profits as a result of the Coronavirus. We know that global supply chains have already been disrupted due to the China shutdown, while the services sector has also been hit by a sharp slowdown in travel and other activity.

How long the Coronavirus will continue to cause increased volatility is unknown but the best reference we have on what to expect is China itself, given that the virus has been present there for a number of weeks longer than Europe. Despite not being back to “normal”, it is clear to see that there has been a slowdown in the rate of spread in the virus, and businesses are slowly but surely returning to ordinary levels of activity. This suggests the worst may have passed and is a positive sign, albeit early and uncertain, for the rest of the world.

Another reason to argue against the level of panic we´re seeing is due to the low mortality rate so far, which depending on the report you read is estimated at around 1%, reflecting the fact that serious cases are mostly limited to the elderly or those with pre-existing conditions.

Keep invested?

The recent market turbulence is a classic example of why we favour using actively managed model portfolio funds, as fund managers who actively manage funds have the ability to change asset allocations at the press of the button – much quicker than you or I can react to movements in the market by sending dealing sheets and waiting for them to be actioned. Diversification is also key within a portfolio, both in terms of sector and geographical location.

In such catastrophic market times where losses on investments are inevitable, the next best outcome is to minimise any loss as much as possible. Some investors could ask the question; “Why not disinvest completely and avoid any further losses in a market decline?”. Well, the answer to that is not so straight forward – as nobody knows for sure when we are going to hit “the bottom” of the fall. What happens if we sell everything today and markets rally again in the next week or two? The investor would then find themselves in a position in which they have accepted a loss, missed out on the recovery gain and would then be facing reinvesting into the market at a once again heightened level.

Trying to “time” the market is a virtually impossible exercise and there is a famous saying within the industry which goes as follows; “It is not about timing the market, it is about time IN the market”. It is referring to the importance of medium-long term investing, and not trying to get a quick win.

This is backed up by a study Bloomberg did at the end of 2018, which looked at a 20 year period running from 01.01.1998 to 31.12.2017. It must be said that this study does not take into consideration the Coronavirus of 2020, but it does incorporate the 2008 Financial Crisis which caused the biggest downturn in markets in recent times.

The study concluded that if you had kept money invested in the S&P 500 Index (USA´s top 500 Companies), the average annual return over the 20 year period would have been 7.2% per annum – a steady return.

However, if you missed just the best 5 days (in the whole 20 year period), this same annual average return would have dropped to 5.02%. A whole 2.18% less each year. To put this further into perspective, if you had missed just the best 40 days in the same 20 year period, your average annual return would have been a negative -2.8% return.

At the top of this update is a visual graph which demonstrates a number of different events since 2009 which have had detrimental effects on markets worldwide. The important thing to take from the graph is that markets have always bounced back, sooner or later.

ANALOGY: Imagine buying a house for a value of 200,000€ and then shortly after the housing market suffers through a tough period which causes the same property´s value to fall to 160,000€ - would you sell it? In most people´s cases, the answer would be “no, not unless there was an urgent need for capital”. You would expect to ride it out and property values to recover over time. 
 
As advisers, all we can do is take guidance from the specialist investment managers and analysts who we deal with. The fact is, the Coronavirus was a sudden unexpected event which nobody could have predicted - at the start of a year which was tipped to be buoyant.

The fund managers we have spoken to still believe this to be a short-term problem which could last for a few weeks. In the position we find ourselves now, we do not believe it to be the best time to disinvest, based on the analytics and reasons given above. However, we are aware that investor´s money is their own money at the end of the day and we understand that each person will have their own view on the situation.

We would therefore be more than happy to discuss the above with you in greater detail.
Please stay home and stay safe. The office is currently closed to the public, and we are unable to meet face-to-face, but we are here taking your emails and phone calls during the regular office hours.

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